A Break For Housing Tax Breaks?

October 26, 2013

Here's a side effect of the 16-day federal shutdown and debt-ceiling crisis that could prove popular among tax-sensitive homeowners: The stalemate removed even the remotest possibility that Congress could undertake fundamental tax reforms curtailing housing breaks this year and renders it unlikely next year as well.

This means that the mortgage interest deduction, local property tax write-offs, second home deductions and capital gains exclusions are safe for the time being — despite a far-reaching tax reform package taking final shape in the House which may be outlined by Ways and Means Committee Chairman Dave Camp, R-Mich., in the coming weeks and could target these write-offs directly. A parallel reform effort is underway in the Senate but reportedly is not as far advanced as Camp's.

Even if the bipartisan special committee appointed recently to resolve differences between House and Senate budgets by Dec. 13 proposes a tax reform schedule, the prospects for any serious action appear slim.

As a general matter, Democrats insist that any major reforms produce net new revenues — taxes — to help lower the federal deficit. Republicans counter that by streamlining the labyrinthine tax code and lowering the top marginal brackets for corporations and individuals, the economy will be stimulated and generate more earnings. Those additional earnings, in turn, will yield greater tax revenues for the government and lead to lower deficits and debts.

Through an extraordinary effort, Camp has managed to keep details of his plans secret by excluding Democrats from the bill-drafting process, strictly limiting access by staff members to meetings and imposing a gag order on participants. But given his publicly announced goals of sharply lower top tax brackets — 25 percent for corporations and individuals — housing analysts can't see how he can make up the lost revenue without deep cuts in current individual tax deductions.

J.P. Delmore, federal legislative director for the National Association of Home Builders, said that "we expect to see changes" to existing real estate and mortgage-related write-offs in the Camp tax reform package. The overall plan, according to Delmore and other key tax experts, is likely to touch virtually every industry and taxpayer in some way. Whatever pain a given taxpayer experiences from the loss of deductions or credits theoretically would be balanced out by lower taxes elsewhere. Cutting total write-offs for mortgage interest, for example — whether by eliminating the deduction altogether or capping it — would be counterbalanced by an individual paying taxes at a lower marginal rate.

At the bottom line, so the theory goes, the country would get a much simpler system with lower tax rates on incomes but far fewer tax preferences that favor one group of citizens over another — one of the main critiques of current housing tax breaks.

Reformers often cite real estate property tax deductions as a case in point. These write-offs cost the Treasury approximately $30 billion a year, and reformers argue that they are heavily skewed toward owners in high-cost, high-tax states such as California, Connecticut, New York, New Jersey and Maryland. The mortgage interest deduction costs the government more than twice as much in tax revenue — about $70 billion a year — and also shows geographical differences based on home prices and sizes of mortgages.

Under the current system, only people who itemize on their federal tax returns — a minority of all taxpayers — can claim deductions.

Details about precisely how Camp's forthcoming bill and the Senate counterpart handle potentially explosive issues such as reining in housing write-offs may not prove to be crucial in the near term. That's because there's no sign in the current Congress of the sort of political comity necessary to craft an agreement.

Democrats and Republicans can barely work out temporary solutions for a single fiscal year's budget, much less fundamentally remold a sprawling tax code that's been getting more complex and more heavily influenced by special interests year after year.

Homeownership is one of those special interests, of course, but one with millions of current beneficiaries, large numbers of whom vote their pocketbooks.

Bottom line: With 2014 an election year for all 435 members of the House, and with enormous fissures not only between the parties but within their own caucuses on key issues, the odds against major tax reform affecting real estate next year or even well into 2015 are steep — especially in the wake of the latest budget debacle.